Business Acquisitions

Business Acquisition Screening Checklist

I use this before spending real time or money on due diligence. The goal is not to prove the deal works. The goal is to find out early if it does not, so you can move on or ask better questions.

What it helps with

Screen seller motivation, verifiable financials, customer dependence, team continuity, and possible transaction structures.

When to use it

Use it after an initial seller conversation and before committing to full diligence or drafting a letter of intent.

How to use this resource

Request source documents and mark each answer as verified, seller-reported, or unknown.
Reconcile revenue with deposits and ask for evidence behind every proposed add-back.
Record the owner-dependent tasks, top-customer exposure, transfer requirements, open questions, and a pass or proceed decision.

1. Seller motivation

Why is the owner selling now?
What does the owner plan to do after the sale?
Is the seller open to a transition period, and for how long?
Is the seller open to seller financing or an earnout?
Has the business been listed before, and what happened?

2. Financial review

Collect three years of tax returns and profit and loss statements, plus year to date.
Match reported revenue to bank deposits.
Review gross margin and how it has changed over time.
Calculate seller's discretionary earnings or EBITDA.
List every add-back and ask for proof of each one.
Separate one-time items from recurring items.
Review accounts receivable aging and accounts payable.
Understand seasonality and monthly cash flow swings.

3. Operations and team

List every role, who fills it, pay, and tenure.
Identify which jobs the owner does personally.
Check whether written procedures exist for the core work.
Review equipment, vehicles, and their condition.
Identify key vendors and whether terms transfer.
Review the software and systems used to run the business.

4. Customer concentration

What share of revenue comes from the top customer? The top five?
How much revenue is recurring or under contract?
Are customer contracts assignable to a new owner?
What is customer retention year over year?
Where do new customers come from today?

5. Legal and compliance

Confirm entity type, ownership, and good standing.
Review required licenses and permits and whether they transfer.
Check for pending or past lawsuits and complaints.
Review leases for the location and equipment.
Confirm employees and contractors are classified correctly.
Confirm sales tax, payroll tax, and insurance are current.

6. Deal structure options

Asset purchase or stock purchase, and the tax effect of each.
Cash at close, seller note, SBA or bank loan, or a mix.
Earnout tied to future performance.
Working capital and inventory included in the price.
Non-compete and transition agreement with the seller.

7. Red flags

Seller cannot or will not provide records.
Revenue on tax returns does not match the listing.
Add-backs make up most of the claimed profit.
One customer or one employee holds the business together.
Declining revenue with no clear explanation.
Pressure to close quickly without diligence.

8. Next steps

Record a pass or proceed decision with the reason.
If proceeding, write a list of open questions for the seller.
Submit a non-binding letter of intent with price, structure, and a diligence period.
Engage an accountant and attorney for full due diligence.
Build a 90-day transition plan before closing.

Illustrative example

See how to apply it

Sample figures or process, not John Her results

Sample figures only, not a John Her acquisition: seller-reported annual revenue $400,000 and claimed add-backs $40,000.
Bank deposits have not yet been reconciled to revenue, and one customer accounts for 35% of reported revenue.
Decision: Pause screening until deposits, add-backs, customer contract transferability, and owner handoff are documented. These sample figures are not operating results.

Shared metric definitions

Use the same meaning for these terms across the resources. Only apply metrics relevant to your review.

Revenue: Income earned or invoiced in the period, before subtracting expenses. Keep the same accounting basis across comparisons; it is not the same as cash received.
Collections: Cash payments actually received in the period, including payments for earlier invoices.
Operating expenses: Recurring costs required to operate, excluding financing payments; note separately any taxes, capital repairs, and one-time items not included.
Net operating income (NOI): For property, effective gross income after vacancy and credit loss minus operating expenses, before debt service and income taxes.
Cash flow: Net operating income minus debt service for a property; for a business, cash received minus cash paid in the period. State any taxes and capital spending excluded.
Labor cost: Wages, payroll taxes, and contractor pay for the period.
Customers lost (churn): The number of customers who canceled or did not renew during the period; do not confuse this count with a percentage churn rate.

Free to use and share. This is a general working tool, not legal, tax, or financial advice.

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Business transition video

Thinking Through an Ownership Transition

Pool service business preview for a discussion of ownership transitions

A partnership can be one way to discuss an owner's transition, but responsibilities, control, valuation, cash needs, and exit terms must be clear to both sides. Ask what the seller needs and what work remains after a handoff. This written takeaway is a topic summary, not a verbatim transcript.

Use the Business Acquisition Screening Checklist